Money markets remained tight on Wednesday as call rates inched up to 6.92% from 6.86% on Tuesday. Banks borrowed a fairly large sum of Rs 1,35,945 crore though the quantum was slightly smaller than the Rs 1,48,490 crore that they accessed on Tuesday from the Reserve Bank of India’s (RBI) repo windows. The yield on the ten-year benchmark paper closed at 8.03%, 4 basis points higher than Tuesday’s close of 7.99%.

Said a head of treasury at a large foreign bank.?The regulators are concerned about the present liquidity conditions but we believe once the government starts spending, shortage should ease. However, in the second half of December, when advance tax outflows kick in, there would be further bouts of a shortage.

Having said that, the central bank is likely to come up with more buybacks or may reduce the overall size of auctioning of treasury bills to keep liquidity under control.?

Meanwhile, three-month CDs (certificates of deposits) were commanding yields of 8.23% on Wednesday, almost flat compared with the Tuesday levels. Companies were paying a higher rate to borrow through commercial paper (CP). Yields on the three-month CPs stood at 8.65%, higher than 8.57% on Tuesday and 8.52% on Monday, while volumes touched Rs 2,400 crore. CD volumes stood at Rs 5,800 crore as against Rs 6,400 crore on Tuesday.

A fortnight ago, the central bank re-introduced the special second liquidity adjustment facility (LAF) for five weeks till December 16, 2010. The facility will allow banks to access liquidity from the LAF window to the extent of up to 1% of their net demand and time liabilities or roughly Rs 50,000 crore.

Added Joydeep Sen, SVP (advisory desk) at BNPP Wealth Management, ?We expect the systematic liquidity to ease over a month or ?two once the government starts spending and the IPOs ?are completed.?

The yield on the three-month commercial paper has moved up to 8.65% now from 8.4% in end-October, due to the continued liquidity shortage, while the one-year CP yield has moved up to 9.1% from 9% in the end of October. Sen observes that yields on commercial papers will ease only when the tightness in liquidity eases in the system.